Cash management is critical to the health of any business.
Even if a business is profitable, without cash they can go under in a matter of weeks. There are several methods used to increase cash levels. The primary methods include increased customer screening and credit checks, prompt billing/invoicing, offering early payment discounts, expediting deposits, and factoring. Each of these methods can help increase cash flow.
A rigorous credit check on new credit customers can help increase cash flows by building a solid customer base with customers known for paying on time and regularly. Cash flow forecasting and cash management will become much more predictable and effective if the timing of customer payments is dependable.
Prompt invoicing should be any company’s goal. If a company lags on creating an invoice, the cash inflows will be inadvertently delayed past the net 30 terms.
In other words, if a company takes an extra week to invoice, the customer now has an extra week before their terms are due, delaying cash inflows by that additional week. In order to expedite cash inflows, invoices should be sent the same day as the product ships or the day the project is completed (assuming invoicing is done upon completion of services rendered).
Offering early pay discounts is a great way to both increase cash and help retain a solid customer base. Customers are instinctively drawn to vendors offering discounts; offering a small early pay discount can help to both build and retain your customer base.
Expediting deposits is now much easier with the accessibility of remote check scanners. Companies now have the ability to scan checks directly into their account, without having to go to the bank.
If your company has concerns for safeguarding incoming checks, lockboxes should be considered. Lockboxes allow checks to be mailed straight to the bank and will be deposited into your account by the bank. Lockboxes help eliminate some of the lag time between the traditional check receipt and bank deposit method.
Factoring receivables can help cash inflows because a third party factoring company will front cash as a short term loan. The factoring company will take a cut of the pledged receivables, but cash will be available for immediate use.
All of these measures can increase cash flow. A cost evaluation must be done on each method to determine which is the best strategy for your business. For more on the cost factors to consider for each of these, look for my next blog.Written by: Jake Cavanagh TGG Accounting Works Cited: “Management of Cash and Cash Equivalents”. Becker Professional Education, Business. 2012 Ed. Timothy F. Gearty. Becker Professional Education, 2012. Pp. 39-40.